Demand for Fed consumer program rises to $11.5 billion

By IBT Staff Reporter On 06/02/09 AT 7:40 PM

The flagship U.S. program to revive consumer and small business lending picked up pace in June, showing investors have grown more comfortable with taking part in the government initiative and appetite for risk has increased across all markets.

The lending facility is a crucial part of the Federal Reserve's and Treasury's efforts to lower borrowing costs for consumers for everything from student loans to a new car, which had skyrocketed after credit markets froze last year.

In June, investor demand for Fed loans rose to about $11.5 billion, up 8 percent from May and up 145 percent from the first round in March.

The Term Asset-Backed Securities Loan Facility (TALF) -- announced with much fanfare in November -- had some trouble getting out of the starting block in March and April.

New York Fed President William Dudley said in April that the program had initially suffered from some investors' worry that they could become subject to the same heated scrutiny on their pay as banks that received bailout money. Investors said they were also initially put off by complex paperwork.

In March and April issues related to the Customer Agreement kept many participants on the sidelines. By May, many of the issues had been resolved, said Brian Loo, portfolio manager at Metropolitan West Asset Management in Los Angeles.

He said the three-year, non-recourse funding offered by the TALF was attractive to investors.

Some economists had feared the program would not gain enough traction to be effective -- a worry that has since been soothed.

Investor interest was broader than in previous rounds, with loans for premium finance and servicing advances requested for the first time.

But demand was still clustered around auto and credit card ABS, at the heart of the consumer lending problem. Investors requested $6.2 billion for credit card TALF loans and $3.3 billion for auto TALF loans.

In this first phase of the program, the Fed lends money to investors against newly issued asset-backed securities as collateral.

Earlier, a primary dealer said U.S. consumer finance debt issuers, including Citigroup and Ford Motor Co , sold as much as $16.5 billion in bonds eligible for this round of the Fed's program.

Auto and credit cards are the biggest categories of consumer credit, and that's what the program is hoping to tackle, said Michael Feroli, economist at JP Morgan in New York.

Asset-backed securities spreads have tightened sharply since the program was announced in November.

Consumer ABS issuance plummeted in the fourth quarter of 2008 to $4 billion from $50 billion in previous quarters, but issuance has picked up since with help of deals supported by Fed loans, and stronger conditions are luring investors back into the market, traders and analysts said.

The total amount of loans requested in the first four rounds of the Fed's program is about $28.5 billion -- still only 14 percent of the $200 billion the Fed said it could lend for the program's initial phase. The Fed has said the program could grow to $1 trillion.

The next phase starts in mid-June when applications for newly issued commercial mortgage-backed securities are due. In July, the lifeline will be expanded to older, so-called legacy commercial mortgage backed securities, as part of a comprehensive government plan to remove so-called toxic assets from banks' balance sheets.

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